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Avoid complacency with your SMSF's investment strategy

Your SMSF is required to have an investment strategy which is a plan for making, holding and realising investments in line with the fund’s investment objectives. It’s a common misunderstanding that the strategy should be a mere statement of the types of investments your SMSF will invest in.

There's more to it than many trustees think

But that’s not enough. The Australian Taxation Office (ATO), as a regulator of SMSFs, has recently said that trustees need to explain why the fund has made the investments. They also are interested in how the strategy provides benefits to each fund member on retirement or how it will provide for their dependants after the member’s death.

Don’t be surprised if the auditor of your SMSF takes greater interest in the investment strategy because it’s a requirement that it is reviewed regularly.

If your SMSF’s investment strategy is general and has not considered the risks in making, holding and realising investments in addition to the likely returns, it may have a problem complying with the superannuation law. As trustee, you need to consider the objectives of the fund and any cash flow requirements plus the members’ insurance requirements.

The superannuation law requires that a fund trustee must consider:

  1. The fund’s investments as a whole and include the extent to which those investments are diverse or involve exposure of the fund to risks from inadequate diversification.
  2. The liquidity of the fund’s investments, having regard to its expected cash flow requirements.
  3. The ability of the fund to discharge its existing and prospective liabilities.
  4. Whether the trustees have considered insurance cover for one or more fund members.

You may be the sole member of your SMSF or have recently become the sole member of an SMSF because of a change in membership. Your adviser may recommend a review of your SMSF’s investment strategy to fine tune any change in the fund’s cash flow requirements, investments and maybe the insurance needs of members. If you don’t have an adviser, then it could be time for you to review it.

Investment strategy and fund audits

During the last six months, the ATO has focussed especially on SMSFs that have high concentrations of investments in one asset class such as property, shares, cash or fixed deposits. It sent out around 18,000 letters to remind SMSF trustees that the fund’s investment strategy should justify the is a lack of diversification.

In the first instance, they require the fund auditor and you as trustee to make any changes. We have seen a renewed interest by auditors in closely examining funds to ensure the investments are consistent with the fund’s investment strategy. This is usually brought to the attention of the trustees in the auditor’s Management Letter but in the worst cases may be brought to the ATO’s attention.

If your SMSF’s investment strategy doesn’t adequately demonstrate what the law requires, you probably have one of two options:

  • Replace your SMSF’s current investment strategy with one that meets the Superannuation Industry (Supervision) Act, or
  • Provide an amendment to the current investment strategy which provides additional information on how the trustee(s) have considered the above requirements.

In most situations, auditors have accepted an amendment that includes the extra information required. This usually covers how the trustee has considered the SIS requirements and why investments have been made to provide the required benefits. 

What you need to do if there is a change

Your SMSF’s investment strategy must adequately reflect changes. This is especially true following recent stockmarket falls, where asset allocations may have fallen outside defined bands. A good SMSF administrator should advise you when this happens, as we do with clients of SuperConcepts. Other changes include where:

  • the cash flow requirements of the fund alter if you decide to start or stop an income stream
  • a lump sum is to be paid in cash,
  • someone has joined or ceased as a fund member.

The law requires a regular review and the trustee’s confirmation that it has taken place, usually each year.

 

Graeme Colley is the Executive Manager, SMSF Technical and Private Wealth at SuperConcepts, a sponsor of Firstlinks. This article is for general information purposes only and does not consider any individual’s investment objectives.

For more articles and papers from SuperConcepts, please click here.

 

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